Friday, 28 Oct 2011 | Sourced SMH
Iron ore prices have continued to crumble, potentially wiping more than USD 10 billion from annual export earnings should the lower levels be sustained to the end of next year.
Prices for the steel-making raw material have now plunged by USD 55 a tonne or 30% in the past eight weeks in response to what the Pilbara industry hopes is a temporary slowdown in demand from the world biggest consumer, China.
The price dump threatens to bring to a halt the rapid growth in mining company profits of the past two years as much as it squeezes federal government revenue expectations from the booming sector. Treasury does not disclose the commodity price expectations used in the budget process but it is believed to be no different from most forecasters in assuming an iron ore price reduction from a forecast 2011 average of USD 162 a tonne to a more modest USD 150 a tonne for 2012.
But USD 150 a tonne has quickly become a possible high-side expectation, with iron ore plunging 7.2% to USD 128.50 a tonne on Tuesday. Should the lower price level prevail as an average for 2012, there would be a USD 10 billion shortfall on a USD 150 a tonne expectation. At the corporate tax rate, that would punch a USD 3 billion hole in federal taxes. But the industry remains upbeat that stronger iron ore prices will return, and is eager to remind investors that operating costs of less than USD 50 a tonne in the Pilbara mean that even at the lower prices, the margins in iron ore remain fat.
Mr Nev Power Fortescue Metals chief executive officer added his name to the upbeat list. He said Chinese steel mills were going through a period of destocking that, once completed, should see pricing and demand return.
Mr Power said ''We are still selling all of the product that we are producing so there doesn't appear to be any major issues in that sense. We might see a couple of months of some volatility but then we would expect strength to continue.''
He was speaking after announcing that Fortescue had completed a well-flagged junk-bond raising in the US market that pulled in USD 1.5 billion.
Mr Power said the raising gave absolute certainty to the group's previously announced USD 8.4 billion expansion from annual production of 55 million tonnes to 155 million tonnes of iron ore. He said that “There was an opportunity to do more of the funding by internally generated cash flow. However, we wanted to remove any funding issues going forward. This raising has given us the balance sheet capacity to cover any eventuality in terms of timing.''
Iron ore prices have continued to crumble, potentially wiping more than USD 10 billion from annual export earnings should the lower levels be sustained to the end of next year.
Prices for the steel-making raw material have now plunged by USD 55 a tonne or 30% in the past eight weeks in response to what the Pilbara industry hopes is a temporary slowdown in demand from the world biggest consumer, China.
The price dump threatens to bring to a halt the rapid growth in mining company profits of the past two years as much as it squeezes federal government revenue expectations from the booming sector. Treasury does not disclose the commodity price expectations used in the budget process but it is believed to be no different from most forecasters in assuming an iron ore price reduction from a forecast 2011 average of USD 162 a tonne to a more modest USD 150 a tonne for 2012.
But USD 150 a tonne has quickly become a possible high-side expectation, with iron ore plunging 7.2% to USD 128.50 a tonne on Tuesday. Should the lower price level prevail as an average for 2012, there would be a USD 10 billion shortfall on a USD 150 a tonne expectation. At the corporate tax rate, that would punch a USD 3 billion hole in federal taxes. But the industry remains upbeat that stronger iron ore prices will return, and is eager to remind investors that operating costs of less than USD 50 a tonne in the Pilbara mean that even at the lower prices, the margins in iron ore remain fat.
Mr Nev Power Fortescue Metals chief executive officer added his name to the upbeat list. He said Chinese steel mills were going through a period of destocking that, once completed, should see pricing and demand return.
Mr Power said ''We are still selling all of the product that we are producing so there doesn't appear to be any major issues in that sense. We might see a couple of months of some volatility but then we would expect strength to continue.''
He was speaking after announcing that Fortescue had completed a well-flagged junk-bond raising in the US market that pulled in USD 1.5 billion.
Mr Power said the raising gave absolute certainty to the group's previously announced USD 8.4 billion expansion from annual production of 55 million tonnes to 155 million tonnes of iron ore. He said that “There was an opportunity to do more of the funding by internally generated cash flow. However, we wanted to remove any funding issues going forward. This raising has given us the balance sheet capacity to cover any eventuality in terms of timing.''
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